Law: Freeing the little fish from the regulatory net: Roger Trapp reports on recent moves to exempt small companies from rules on disclosure and annual accounting

It is one of those strange pieces of timing that just as one accountancy group was preparing to announce its practical solution to an aspect of deregulation, it emerged that another was preparing to carry the process much further.

The debate is still continuing over the effectiveness of exempting - partially or totally - small companies from having their annual accounts audited. It has long been pointed out, for instance, that banks will require audits before approving any significant loans.

Last week, however, the Auditing Practices Board cleared up the confusion as to what it expected from the half-way-house compilation report that companies with turnover of more than the total exemption threshold of pounds 90,000 and less than pounds 350,000 will have to obtain from 'suitably qualified accountants'.

Roger Lawson, president of the Institute of Chartered Accountants, has welcomed the APB's new guidelines, published on 21 October. He says the removal of the words 'audit' and 'examination' in what the APB terms 'audit exemption reports' should ensure there is no confusion 'as to the assurance the report gives compared to that given by an audit'.

He is also pleased that the board has answered a recurrent criticism of the draft guidelines by making the statement shorter and easier to understand.

But he warns: 'The deregulatory objective of exemption from audit will only be fully served if the annual accounting and disclosure requirements for small companies can also be relaxed.'

The gist of the consultation document on this issue has already leaked out.

Namely, companies with annual turnover of less than pounds 2.8m should be exempt from all but four of the existing statements of standard accounting practice and all the financial reporting standards produced by the Accounting Standards Board.

This is the sort of change that advisers called for when the campaign to abolish the audit for small companies began in earnest a couple of years ago. But even so, Ken Wild, the Touche Ross technical partner who chaired the working party drawn from the various accountancy bodies, feels the report is 'radical'.

Pointing out that it went 'a long way beyond compilation reports', he says the paper - to be formally published within two to three weeks - is 'proposing some fairly major changes'. Although it will go out for public comment, he hopes that the presence of representatives of the various groups that used accounts will ensure that the final version is not too far removed from the original.

'I think the case is well made, although some people will instinctively say 'you can't do that',' he says.

The working party, which was set up with the approval of the Accounting Standards Board, originally attacked the problem of deciding which companies to exempt from regulation by considering the ideas of cost-benefit tests and 'public-interest' companies. But in the end, Mr Wild says, it went for 'a quite different argument' - communication.

He says there are many complicated rules for large companies that carry out many different transactions in the course of a year. But he believes that it is inappropriate that small companies should be burdened with these rules, where such occurrences would be either one- offs or not happen at all.

'If you don't push them into complicated rules, you make their accounts easier to understand,' he says, adding that accountants should not have to explain accounts to the managers of the business to which they relate.

But having been radical up to this point, the group opted for pragmatism when deciding on what made a small company. The figure of pounds 2.8m turnover is the definition in the Companies Act.

Even so, that takes 90 per cent of companies out of the regulatory net. And it makes one wonder why so much effort has been spent taking many fewer companies out of the requirement for statutory audits.